I followed a link the other day to this academic paper purporting to show that the bailout of GM and Chrysler was a success. I was flabbergasted to see that the authors are Austan D. Goolsbee and Alan B. Krueger. WTF? These folks were part of the Obama Administration. This is their own policy they are passing historical judgement on. This is roughly equivalent to a economics journal seeking a paper on the success or failure of Obamacare and having Valerie Jarrett write it. How does this kind of conflict of interest pass any kind of muster?

I only skimmed the paper. I know these are two smart guys but it seems to include exactly the sort of facile analysis you would expect from a political hack, not two smart economists. I can't believe these guys would have accepted many of the assumptions they make here had they not been directly involved. Just to pick two things at random:

They seem to stick with the assumption that millions of jobs would have simply gone *poof* had the government not intervened. Yes, this happened at Solyndra, but in most cases industries operate almost seamlessly in bankruptcy. The odds are, for example, that you have flown on an airline in Chapter 11 and didn't even know it. They make a specific argument that somehow it would be bad to have both in bankruptcy at the same time, but I can remember several times when there were multiple major airlines in bankruptcy. In fact, if both went bankrupt at the same time, one could argue it would lessen their market share loss since a major competitor was in the same boat. To the extent that the companies would have continued to operate under Chapter 11, which is 99.9% likely, then all the government did was insert itself into the bankruptcy process to overrule laws about who gets what in a bankruptcy to redirect spoils to their favored constituencies

Yes, GM and Chrysler are doing OK now, but they usually do OK at the top of a business cycle. To my eye though, nothing fundamentally changed about how they are managed and operate. The same structural and cultural problems that existed before exist today. The same under-utilization of talented workers and valuable assets that existed before exists today. No real reckoning occurred -- in fact the bailout looked to me at the time as an exercise to use taxpayer money to avoid a true housecleaning. These companies have done OK, but what would they have done with a more thorough housecleaning?

Mercury:

Matthew Slyfield:

Chrysler didn't get bailed out, they got screwed.

Chrysler was trying to go through an normal bankruptcy when the Obama administration intervened without an invitation by Chrysler management or the bankruptcy judge and strong armed the judge and Chrysler management into a settlement that put the UAW ahead of secured creditors and handed a significant chunk of Chrysler equity to the UAW all in violation of bankruptcy laws.

joe:

The argument
is basically that the capital markets were frozen and could not have provided
DIP financing. This would have meant a liquidation. Not sure who would have
bought, but since the supply base is paid when the truck is built, and they
were also stretched thin, this would have put under a lot of suppliers.

For Example

GM Goes into
liquidation and stops building cars.

The company
that makes their steering parts goes bankrupt.

They also make steering parts for the F150 and the Nissan Titan, and Toyota
Camry, so those plants experience production disruptions. This impacts their suppliers.

This was
really the doomsday scenario…but it wasn’t that unlikely.

can you give
me a quick list of the companies that were providing DIP financing in the
amounts required at that time? Maybe with some data showing that it was
actually happening?

brotio:

Even if GM had faced liquidation, the Regressive assumption that Ford, Toyota, Volkswagen, and others would have not found anything of value in GM's property or labor force indicates that Regressives either know more about the sorry state of GM than they're letting on, or they're economically stupid. Could be both, I suppose.

Bluegrass:

Joe is basically right. Without DIP no Chapter 11-straight to 7. At this point banking system had not been stabilized so there was no chance of private sector bankruptcy financing. Providing DIP was not unreasonable at the time.

That point made, I agree with most of Coyote's assessment. GM and Chrysler are still poor competitors and will likely face crises in the future. And there was a lot of political pay-back in the process.

Harry:

In a normal bankruptcy, the first people to lose are the common shareholders, followed by the preferred shareholders, followed by the unsecured shareholders, followed by the secured shareholders. Of course, current creditors, like the light company, get paid first, maybe proportially first. Normally the senior secured creditors may not get paid at all, but they are first in line to become the new stockholders. Oh, the lawyers also get paid before the bankruptcy is settled. Think Bleak House.

In GM's case, all of this was disregarded. (Same thing for CITI, where the stockholders did not lose everything.) I can remember a broker showing me some GM Senior Notes and telling me they were GM Corporate paper, as if that were something special, like New York, New Haven, and Hartford notes.

My guess is that at the very least in a normal bankruptcy some (many) people would be out of jobs, namely the people being paid for not working as part of GM's "Jobs Bank" wherein one got laid off but still got paid. In a normal bankruptcy a lot of Senior Vice Presidents, Group Presidents and Vice Presidents would have been let go, and executive post retirement benefits would have been cut, including the annual physical at the Greenbrier.

The new stockholders could have then kept their stock or sold it at the market. In any case, GM would have to be changed for the better, or if not would have to go through the wringer again further down the road. That would be their business, not my business, unless I bought GM common.

bannedforselfcensorship:

ColoComment:

Great article by Zywicki. Thx for linking: I had not seen that one before. One of my biggest disappointments at the time was the refusal of the courts to defend the integrity of the bankruptcy process. The U.S. bankruptcy courts have been tremendously successful at enabling the orderly recovery of worthy enterprises, or the redistribution of assets to more productive uses. The perversion of that process was disheartening.

Nimrod:

bigmaq1980:

"Normal" bankruptcy allows the company to legally reset its contracts. Part of the problem is the burden (across several aspects - work rules, wages, pensions) these all have on the companies.

What happened was nothing more than payoff for the support of a political constituent (unions and executives alike).

If the company did not survive (as a going concern), but it came to selling the assets (at fire sale prices), no doubt they would have been attractive to healthier car companies of that time (e.g. Toyota?), who would in turn (after a short period) need to employ many (as many as before, no, only as many as would make economic sense).

We, as taxpayers, might have been better off allowing a normal bankruptcy to happen and then just give the ones unemployed one or two years of wages.